Observations and Insight

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A Wrinkle in the OCC’s Capital Plan?
Doug Ashburn – JLN

Friday was the last day to file a comment letter to the Securities and Exchange Commission on a capital raising plan, and two of the 12 U.S. options exchanges have voiced an objection.

On January 26, 2016, the SEC published and sent out for comment a proposed rule change at the Options Clearing Corp. that would allow it to raise its target capital reserve from $25 million to $247 million. Under the proposal, the five legacy “equity holder” exchanges – CBOE, ISE, NASDAQ OMX PHLX, and the two NYSE exchanges (NYSE MKT and NYSE Arca) – would augment their capital contributions up to the new buffer, in exchange for a perpetual dividend from the OCC from its clearing fees. The remaining options exchanges – BATS Options, NASDAQ Options, NASDAQ BX, BOX, C2, Gemini, and MIAX, are non-equity holders.

The dual-class system dates back to 2002, when OCC amended its rules to remove the ownership requirement for firms for which it provides clearing services. It should be noted that, of the seven non-equity holders, four of them – C2, NASDAQ Options, NASDAQ BX and Gemini – are all subsidiaries of equity holder exchanges. From a corporate level, that leaves BOX, BATS and MIAX as the possible odd-men out, as non-subsidiaries.

In response to the proposed change, two of the non-equity exchanges – BOX and BATS – filed comment letters claiming the rule would put them at a competitive disadvantage, as clearing fees will be raised across the board, with the five equity-holder exchanges earning an annual dividend that could be used to pay down their respective contributions.   

Read the BOX Letter  =>  http://jlne.ws/1zRwr1L
Read the BATS Letter =>  http://jlne.ws/1EdcYyZ
Read the rest of the article at JohnLothianNews.com =>  http://jlne.ws/1wfH04e

Lead Stories

OCC Announces New Leaders to Enhance Business and Product Development and Communications
Press Release – OCC
OCC announced today that Scot Warren has joined OCC as Executive Vice President, Business Development and The Options Industry Council. Mr. Warren has 25 years of experience in global equity and equity derivatives markets, including index services. In his new role, he will provide oversight to further strengthen OCC’s business and product development efforts as well as its communications programs. Mr. Warren’s responsibilities will also include oversight of The Options Industry Council and investor education.
Additionally, to enhance our capabilities and better support the increasingly important role of communications as a systemically important organization, OCC has hired David Prosperi as First Vice President, Public Relations, and Patricia Overstreet-Miller as First Vice President, Corporate Communications, both reporting directly to Mr. Warren.
***DA: This announcement was breaking just as we were hitting the “send” button on the newsletter. More on this tomorrow.

Last shout looms for US option traders
Philip Stafford and Neil Munshi – Financial Times
CME Group is consigning its futures trading floors, once home to thousands of noisy traders, to history. But one section of the floor will shout on: the options pits.
The question on the minds of options floor brokers and traders is how long they will last. Electronic trading is gaining ground for these derivatives, which entitle holders to buy or sell shares or futures contracts at a given price by a certain date.
***DA: For the last 10 years I traded FX options, I entered the year assuming it would be my last one on the floor. I was wrong until I was right.

Europe’s Stock Rally Fails to Damp Anxiety Over Greece: Options
Roxana Zega – Bloomberg
The flood of money pouring into European stocks belies an undercurrent of unease.
While the equities are enjoying their best start to a year since 1997 and investors have poured $4.7 billion in an exchange-traded fund tracking them, the number of bearish Euro Stoxx 50 Index options has climbed to the highest level since before the financial crisis relative to bullish ones.
***DA: In the end, all Greece got was four more months of breathing room. Four more months to not address the root problems. Which is more likely – that the Greek citizenry will band together, start paying taxes, and raise adequate funds to build a 21st Century manufacturing sector, or that the Greek citizenry will use the four months to get capital out of the country?

Hedge Funds Raise Bullish Oil Bets as Drillers Idle Rigs: Energy
Speculators raised bullish oil bets for the first time in five weeks as producers curbed new drilling…
Net-long speculative positions in WTI rose by 5,462 to 209,158 futures and options in the week ended Feb. 17, according to the CFTC. Long positions increased by 2.6 percent to 309,624, while short bets gained 2.5 percent to 100,466.
***DA: Looking pretty soft to me, having broken back below $50 this morning.

Are We In a Volatility Trough?
Adam Warner – Schaeffer’s Investment Research
So, if all the market needed to make new highs was having me leave for a week, I’d have done this sooner. In fact, I’d have taken off for all of 2015!
Remember that volatility everyone was talking about? Not so much anymore. Ten-day realized volatility in SPDR S&P 500 ETF Trust (SPY) now sits below 8 — its lowest level since back on Dec. 9.
***DA: And when will the cattle start feeding from the volatility trough?

The Week in VIX – 2/16 – 2/20
Russell Rhoads – CBOE Options Hub
VIX was down some last week and the newly christened front month March future followed the index lower and then some. Despite the drop, the March future finished Friday at a pretty steep premium relative to the index which shows that despite the S&P 500 making new highs, the volatility market isn’t convinced 2015 will be a repeat of the past couple of years in the equity space.
***DA: I should say not.

The Option Queen Newsletter
The market rejoiced in the Friday session feeling that the Greek tragedy would be resolved and hoping for the stabilization of the EU. The series of new highs printed in the S&P 500 this past week, were without increased volume, which, is not a “good thing.”
Here is the down and dirty on the markets to date: the strong US dollar is killing our export business but the US risk free interest rates are considerably higher than that elsewhere and our currency is strong. Our economy will slow down because the multinationals will be unable to export as much as the used to, the oil industry is contracting and not expanding and simply put, people will be losing their jobs.

Videocast: The VIX ahead of Yellen

Virtu Celebrates Another Year Without a Single Day of Losses
Sam Mamudi and Leslie Picker – Bloomberg
High-frequency trading firm Virtu Financial Inc. reported another year without a single day of losses, extending a near-perfect streak stretching back to 2009 that contrasts with dwindling profits at competitors.
Virtu made money every day in 2014, generating revenue of $723 million and net income of $190 million, according to financial statements filed with regulators Friday. The 148-employee company, which uses computerized strategies to buy and sell everything from stocks to currencies, has had only one losing day in its six years of operation.
***DA: Unless you count the failed IPO that would have valued the firm at $3 billion, followed by a private sale that valued Virtu at $2 billion a couple months later. That was no winner.


Best Options Exchange: CBOE
For exchange operators, market share is the bottom-line gauge of success, failure and all points in between.
If a venue provides market participants with the right liquidity, product choice, pricing and customer service, market participants will trade there; if not, they won’t.
CBOE Holdings walked the walk in 2014, as it led all U.S. options-exchange operators with a market share of about 30%, according to OCC. That comprised 28% from its flagship Chicago Board Options Exchange and 2% from its newer, all-electronic C2 exchange.

CBOE Named “Best Options Exchange” at the Markets Choice Awards
Press Release – CBOE
The Chicago Board Options Exchange (CBOE) announced that the exchange was named “Best Options Exchange” for the second consecutive year at the third annual Markets Media Markets Choice Awards last night in New York City.
The Markets Choice Awards, which seek to recognize “excellence in institutional markets,” determines winners “through extensive interviews with senior market professionals, in conjunction with reader voting on www.marketsmedia.com and consultation with Markets Media’s own Advisory Board.”
The “Best Options Exchange” award recognized CBOE’s continued commitment to product and technology innovation and cited the high marks the exchange received for customer satisfaction. The 2015 Markets Choice Awards’ methodology focused on the opinions of market participants, with a focus on 2014 performance.

Regulation and Enforcement

Pattern of Disobedience at Direct Edge Said to Spur Record Fine
Sam Mamudi, Dave Michaels and Annabelle Ju – Bloomberg
The record fine recently slapped on two U.S. stock exchanges was the result of a history of failing to meet regulators’ demands, according to people familiar with the matter.
In January, the Securities and Exchange Commission revealed an unprecedented $14 million penalty against two markets formerly owned by Direct Edge Holdings LLC. The sanction was so large, according to two people familiar with the matter, because Direct Edge failed for years to meet agency requests to seek approval for a set of trading instructions known as order types and also broke the terms of a 2011 settlement with the regulator.
***DA: Water under the bridge, in my opinion. With the transition to BATS almost complete, we can soon close the book on order type problems related to Direct Edge.

CME fines broker Newedge $1.75 million for metals market violations
Tom Polansek – Reuters
Exchange operator CME Group Inc said on Friday it fined derivatives broker Newedge USA $1.75 million for violating rules in metals markets over two years.
The penalty covers a type of transaction known as an Exchange for Related Position (EFRP), which occurs away from the public marketplace and has caught the attention of U.S. regulators.

As ”Spoof” Trading Persists, Regulators Clamp Down
Bradley Hope – NASDAQ
One June morning in 2012, a college dropout whom securities traders call “The Russian” logged on to his computer and began trading Brent-crude futures on a London exchange from his skyscraper office here.
Over six hours, Igor Oystacher’s computer sent roughly 23,000 commands, including thousands of buy and sell orders, according to correspondence from the exchange to his clearing firm reviewed by The Wall Street Journal. But he canceled many of those orders milliseconds after placing them, the documents show, in what the exchange alleges was part of a trading practice designed to trick other investors into buying and selling at artificially high or low prices.
***DA: Prior to the story we spoke with the author for about 45 minutes in our office. The result? A 5-word quote by John Lothian, three paragraphs from the end. That’s show biz.

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